GXS Insights

Ten Forces Transforming Corporate Banking Connectivity

GXS Market Perspective

The past five years have witnessed the emergence of a number of new operational models, regulatory changes and technology paradigms in the corporate treasury and banking sector. The result is radical changes to the structure of treasury functions within multi-national corporations. The changes are also impacting the relationships between corporations and banks—both the way in which banking products are selected and the service level expectations treasury organisations hold for financial institutions are evolving. There is also a significant paradigm shift in the technical approaches used to exchange information between corporations and their cash management banks.

GXS has compiled a list of the ten primary forces transforming the way in which corporations and banks communicate electronically. The list is based upon studies of market-leading multi-national corporations based in
Western Europe and the United States. The ten forces are not mutually exclusive, but rather interdependent.
Five of the forces outlined are changes that affect overall corporate banking practices—new organisational
structures, payment strategies and management models. The remaining five are technology developments that are impacting the electronic communications between banks and corporate clients.

Transforming Corporate Banking Practices (#1-5)

1. Single European Payments Area (SEPA)—Starting in the 1990s, the European Union began the SEPA initiative to harmonise and simplify payments across the 15 countries which have embraced the Euro as the national currency. The goal of SEPA is to establish a common set of regulations, processes, standards and technologies for making payments across the Eurozone. Consumers and corporations will enjoy consistent pricing and service levels regardless of their country of citizenship and the location of their bank account. As a result, citizens and corporations will be able to make payments in any Eurozone country as easily and cost-effectively as they could in their home nation.With a harmonised approach to payments across Europe, corporations will begin to shift their country-specific finance, accounting and treasury functions to broader Pan-European models. Additionally, selection criteria for banking partners and products will evolve as financial institutions expand their geographic footprint and introduce new, low-cost cross-border payment services.
2. Payment Factories—Historically, corporations have maintained separate Accounts Payable (A/P) organisations in each country to provide the necessary local tax and payment expertise. However, there is a growing trend towards centralising A/P functions into shared service centers, otherwise known as “payment factories.”The shared service centers enable opportunities for higher levels of efficiency in the
   back-office. Productivity improvements can be gained by eliminating country-level staffing and by embracing best practices on a regional level. Further savings can be gained by relocating A/P functions to either captive or outsourced service centers in lower cost geographies.Transitions to centralised, payment factories require staffing and procedural changes, and standardisation of A/P applications.Many multi national corporations are re-evaluating their approach to payment processing as they transition to shared service centers.
3. Centralised Treasury—In addition to creating shared service centers for A/P, corporations are re evaluating organisational models for the treasury function.Many multi-national enterprises are centralising treasury groups on a regional or global basis. Historically, corporations allowed each country to manage its cash needs locally. Centralisation enables a number of efficiencies in the areas of cash forecasting, foreign
   exchange and cross-border payments. However, to realise the benefits, corporate treasury organisations need access to real-time information on account balances, investment holdings and securities prices from their financial institution. Consequently, the transition to centralised treasury models is driving higher demand
   for straight-through processing of information between corporations and financial institutions.
4. In-House Banking—Many large corporations are establishing in-house banks to complement centralised treasury functions. These banks are not officially regulated or licensed financial institutions. However, they act much like a commercial bank by offering payment processing, liquidity management and collections functions to various subsidiaries of a large, global corporation. The creation of an in-house bank substantially impacts the corporate banking interface. Instead of each operating company routing payment transactions directly to a local bank, all disbursements are channeled through the in-house bank at headquarters. Centralised payment processing applications managed by the treasury group are configured to evaluate opportunities to reduce banking fees. Multi-lateral netting, supplier payment consolidation and local funding techniques are examples of services provided by an in-house bank.
5. Consolidation of Banking Relationships—Along with centralisation of internal functions, multi-national corporations are also rationalising the number of banking relationships they maintain. Changing regulations in
   the US, the European Union and countries such as China have enabled numerous financial institutions to develop a global footprint. Consequently, multi-national corporations no longer need to establish local banking relationships in each country of operation. Instead, corporations can consolidate banking providers to the minimal number appropriate to cover the necessary geographic footprint and offer the appropriate product features. As part of the consolidation process, corporations are demanding that financial institutions provide lower processing fees, higher service level agreements and stronger technical integration. Corporations are mandating a minimal set of technology requirements which financial institutions must comply with in order to compete for global banking contracts.

Transforming Corporate Banking Connectivity (#6-10)

6. ERP Consolidation—Most multi-national corporations have a project underway to standardise and consolidate the various ERP applications being utilised within their enterprise. Historically, different brands, operating companies and legal entities have operated autonomously with their own enterprise systems. Fragmentation of ERP platforms prohibits sharing of information across divisions and with headquarters. Standardisation of ERP onto a common platform (e.g., Oracle 11i) enables consistent business practices across divisions and the utilisation of shared service centers for back-office functions. As multi-national corporations consolidate and standardise their finance, accounting and treasury modules, IT organisations are re-evaluating their approach to bank connectivity.
7. SWIFT Connectivity—Several hundred large corporations have registered to participate in SWIFT’s corporate access programs. SWIFT connectivity can reduce the costs and complexity associated with corporate banking communications. Corporations utilise a number of different transmission mechanisms to exchange data with their banks. High volume data transfers typically occur over private lines or Internet-based file transfer. In some cases, older technologies such as dialup connections and fax transmissions are still in use by smaller corporations.Web portals have become an increasingly popular option for bank interfaces recently. With SWIFT access, corporations can replace the broad mix of connectivity mechanisms with a single standardised approach.Messages and files can be sent to SWIFT for routing to any of the over 7,000 banks on SWIFTNet reducing cost and complexity.
8. ISO 20022 XML—Otherwise known as the Universal Financial Industry (UNIFI) standard, ISO 20022 XML
   is designed to replace the myriad of local file formats used for payment processing around the world with a
   single, global message schema.Today, most corporations utilise EDI (e.g., EDIFACT, ANSI X12), country-specific ACH formats (e.g., NACHA in the US) or legacy banking standards (e.g., BAI, SWIFT FIN) to exchange information with financial institutions. The file formats used to send payment instructions and receive account statements vary from bank to bank. In some cases, corporations are required to send more than one type of file format to different divisions of the same bank. The UNIFI vision is for corporations to be able to utilise one message schema to exchange information with any bank in the world.
9. Multi-Bank Cash Reporting—One of the key benefits achieved from centralising treasury functions is the
   improved cash management capabilities.Treasury personnel with visibility to all cash positions at bank accounts worldwide are better equipped to perform cash forecasting, borrowing and investment activities.
   Treasurers must be able to easily collect account balance information from all bank accounts in all countries.
   Multi-bank reporting applications developed by financial institutions and technology providers offer account aggregation services.The services consolidate end-of-day and intra-day balances for all accounts onto a single web portal or channel the information directly into a treasury workstation. Corporations armed with
   enhanced cash visibility can make borrowing or investing decisions earlier in the day, reduce probability of
   overnight idle balances and accelerate the processing of exception items.
10. Bank Relationship Management Software—Bank connectivity has become such a complex issue for corporations that several ERP vendors have introduced specialised software modules to simplify integration.
    SAP recently introduced its “Bank Relationship Management” application.The SAP module offers native support for ISO 20022 XML and SWIFT corporate access. Furthermore, the SAP application has seamless integration with the vendor’s treasury and accounting modules thereby lowering the barriers to straight-through processing with financial institutions. Out-of-the-box support for emerging standards from major ERP vendors will accelerate adoption by multinational corporations.

Additional Forces

The ten factors listed above are revolutionising the way corporations interface with their cash management banks.
The list could be further extended to include technological forces such as Large File Transfer, conversion from cheques to Electronics Funds Transfer (EFT), and banking innovations such as Payments Hubs.

• Conversion from Cheques to EFT—Corporations are rapidly migrating away from cheques and paper instruments to Electronic Funds Transfer (EFT).The most significant transition is occurring in the US, which historically utilised cheques as the primary B2B and B2C payment instrument. Credit cards, debit cards, online
  bill pay and lockbox-based image conversion are rapidly driving B2C payments to EFT. Adoption of EFT in the
  B2B payments segment has been slower. However, procurement cards and Automated Clearing House (ACH) are quickly becoming the primary payment instruments for large corporations. The result is that corporations must communicate a significantly higher volume of electronic payment instructions to financial institutions than with cheques. For large multinationals, the net increase in number of payment messages sent to banks could be in the millions per year.
• Large File Transfer—Corporate treasury groups are seeking more information in faster time frames than
  ever before. For example, in the US the rapid growth of image-based cheque substitution is driving demand for copies of cheque images to be distributed to corporations. Collections organisations retain the cheque
  images for customer service, record-keeping and exception processing purposes.Today, cheque images are burned onto a CD-ROM and shipped via courierto a corporation.The CD-based distribution is becoming too cumbersome and complex for most corporations to manage. Consequently, financial institutions are migrating towards Internet-based file transfer of cheque images. However, many banks and corporations lack the technology infrastructure to support such high volumes of data exchange. New low-cost, high-volume services for Large File Transfer are emerging, promising to further simplify corporate banking communications.